Is The Perfect Storm Here?

Includes: DIA, IVV, QQQ, SPY, VTI
by: Bruce Pile

Back in February, I wrote "A Perfect Storm For Lead Economic Indicators" here at Seeking Alpha. I don't normally lean very hard on what economists predict, but the confluence of the two very accurate recession predictors (ECRI and LEI) and Marc Faber's Zero Hour concept caught my interest. These, along with several other solid lead indicators I discussed in this article all pointed to a new recession soon. Now back in February, we were having a pretty nice recovery going (sub par, but nice) and a recession seemed like crazy talk, and many thought that Lakshman Achuthan, ECRI's chief, had lost his mind by predicting another recession.

Well, a lot has changed with the economy since then, and Achuthan doesn't seem so crazy now. I won't go over all the current economic stats, they are everywhere to digest now. But suffice it to say that the recovery has all but vanished, we are at the edge of a new recession, and the trends are not good and don't appear to be turning on a dime.

After going over all the bad early indicators in the article, I offered hope by pointing to the most comprehensive early indicator of all, the stock market - which at that time was doing very well and not seeing a recession at all. The problem with the market is that its lead time for seeing these things is typically a few months less than that of the lead economic indicators discussed in the piece (maybe 2 or 3 months vs the 6 or 8 months of the LEI/ECRI). So I tempered any enthusiasm offered by the market's behavior with this caveat:

If the next 50 day ema visit behaves like a bull market correction and finds support near there, it stands a good chance of making all the bad signs anomalous and will probably pull the transports into line with the other leader groups. But if it behaves badly there and goes on to take up residence below the 140 ema, all the bad signs may prove to be right.

I had pointed out that, even in the healthiest of bull markets, a pullback to the 50 day ema (exponential moving average) happens about every 2 or 3 months. So if the market was to prove all the other indicators wrong, it would probably have to do so in the next battle at this 50 day line. I'd like to look at what has happened in the market since then - and I caution that if you are squeamish, turn away.

Sure enough, about 3 1/2 months after the previous 50 day battle back in December (won by the bulls), we had another engagement in early April. But this time, the bears won. And the crippled bulls have meekly come back to barely grasp the territory above a now trend-less 50 day and 140 day line. This market now seems to be coming to grips with what the lead indicators were seeing months earlier.

The two market lead groups that are still holding out on the deterioration are the retailers (RLX) and tech (QQQ). These two indexes have plunged below their 50 day ema but stubbornly have stayed above a still climbing 140 day ema, bull territory in my opinion. But they appear to be next in the domino breakdown. These trends are going to be hard to reverse.

Will we see the bear turn pulled out of the fire again as in mid 2010 and 2011? The market wants to believe some more in the Bernanke put before the year is out. But this only promises another baseless, fleeting rally as in the previous fall seasons. As I expressed in the perfect storm article, I agree with Marc Faber that the GDP bang for the debt dollar is no longer there like it used to be. The market is coming to doubt the effects of added monetary effort as well.

When I tune in to CNBC, I am now more and more likely to hear air-time being hogged by every remark, opinion, thought, and whim of the central bankers, and see the capitalist market participants hang on every nuance and plan their money moves accordingly. And I have to wonder, is this capitalism? It is these same people that are bailing out failed capitalists by the dozen instead of having their properties handed over to a new band of capable owners by the courts as in economies of the past. As Jim Rogers keeps pointing out, the cleansing of past cycles no longer happens with big business - and it needs to. We don't really have full strength capitalism anymore. It is a bank/government hobbled form on a European path to become even weaker.

Big banking isn't the solution we need. As Bernanke himself is saying nowadays to Congress, "Don't depend on me and monetary policy to fix this - you have to get your fiscal house in order!" (I'm paraphrasing). Maybe a revolution in Washington this November would do the trick and stop the bear turn taking hold now. But, in my opinion, all the presidential revolutionaries (Herman Cain, Rick Perry, and Ron Paul) have been removed from the game. Maybe I'll write in Jim Rogers on my ballot. Oh wait, he moved to China, where capitalism now thrives unfettered.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.